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Be honest: are you slipping—albeit reluctantly—into the mindset that the price of crude oil is going to be “lower for longer?” Has the thought entered your mind that maybe—just maybe—we’ve done to oil what we did to natural gas: created a seemingly infinite supply that will glut markets for eons to come? Could the price of oil be “lower for forever?”
I know these thoughts have entered into my discussions recently with industry professionals as everyone gives their personal micro forecast of crude futures, an inevitable part of every conversation these days.
Analysts far and wide amplify the thought, as they watch the Saudis pump more oil than ever into the system, price be damned, with the resulting decline in U.S. rigs and production having little impact.
One of those analysts, Raymond James’ Marshall Adkins, in August revised downward his near-term oil price assumptions for 2016 by $10, to $55 WTI/$62 Brent, a forecast he reiterated in November. Some operators would be gleeful to have those prices now.
“Given the extent to which the global oil market is likely to remain oversupplied for longer, we see minimal room for oil prices to improve from the current levels until mid- to late 2016,” Adkins wrote.
His long-term forecast for 2017-2020 puts WTI at $70, and Brent at $77. Similarly, the International Energy Agency in November forecast crude prices to be capped below $80 until at least 2020.
Who can wait that long, and is that enough to save the industry?
Never fear: Tudor, Pickering, Holt & Co. has come to the rescue.
“I’m the antithesis to ‘lower for longer,’” TPH head of macro research David Pursell told a Midland, Texas, audience of more than 1,000 at Hart Energy’s Executive Oil Conference in November. Pursell has pegged WTI to rise to $80 by second-half 2016, based on his nuanced evaluation of the data and trends. “Welcome to the Big Tent Revival portion of the show.”
The perceived long-term oversupply of oil is a mirage, he stated. Specifically, the supply and demand numbers published by the IEA in July for second-quarter 2015—the very numbers that are causing widespread weeping and gnashing of crude-addicted teeth—are wrong, plain wrong.
In a nutshell, IEA reports global demand of 93.1 million barrels per day (MMbbl/d) in second-half 2015, and global supply of 96.4 MMbbl/d. Do the math. “The consensus is we’re 3.3 MMbbl/d oversupplied. There you go; case closed.”
Except for one other IEA reported number: the OECD inventories build was just 1 MMbbl/d.
“Wait a minute. If global supply and demand said inventory built 3.3 MMbbl/d, and OECD (North America, Western Europe and developed Asia) only built a million barrels, where did the other 2.3 million barrels go?” he pondered. “That’s 2.3 million barrels of crude oil and refined products unaccounted for.”
Pursell doesn’t think they went anywhere, he confessed. “I think they’re just bad supply and demand numbers.” In fact, in its October report, he pointed out, the IEA already revised its second-quarter numbers to now reflect just a 2.4 MMbbl/d oversupply, and he believes in a year’s time the second-quarter 2015 numbers will be gradually revised to match the 1 MMbbl/d inventory build. That’s significant.
“It’s a fundamental belief for our thesis that the market is a lot tighter. Our thesis is that inventory data are closer to the ground truth than supply and demand numbers.”
Assuming the market is merely 1 MMbbl/d oversupplied at present, rather than 3.3 million, after projecting forward the same estimated decreases in supply and increases in demand used by the IEA, the market in second-quarter 2016 is then undersupplied by half a million barrels, instead of remaining 1.8 MMbbl/d oversupplied, per IEA estimates.
At issue is the starting point for making forward projections. “If the market is indeed tighter than consensus believes, then modest demand growth coupled with some supply declines will create an undersupplied market as early as 2016.”
Already in 2015, supply has fallen by 75,000 bbl/d per month for the past five months, equating to an 850,000 bbl/d decline year-over-year once extrapolated into next year. Demand has increased by 1.8 MMbbl/d year-to-date. Since 1987, global demand has fallen in only two years. “Betting against global demand is really hard.”
And if that’s the case, then prices are going much higher, said Pursell. “During the second quarter, $80 happens.”
Might it be so.
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